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Seed Weekly - Dearest of Precious Metals

In general, South Africans attach a high importance to precious metals, especially gold. Many believe that the price of gold has a direct link to the well-being of the economy, and therefore follow the price of gold closely in the news. It easily captures the imagination of the broad public because of its perceived simplicity and the ‘realness’ of its value.

In the current environment, where uncertainty and fearfulness reign supreme, gold has become a frequent topic for discussion as it traditionally serves as a hedge in negative market conditions.

Should you wish to invest in gold you have a few options available:

Physical Gold

This is the option that most would argue is the purest form of gold investing. The simplest way of buying physical gold is by means of Krugerrands. It is legal tender in South Africa and widely traded locally and globally, making it highly attractive.

There is a caveat to keep in mind. Gold, in its physical form, does not produce any interest or generate revenue. It is purely supply and demand that dictates the daily price. Demand is likely the more important of the two in the shorter term. Longer term, this may be somewhat more problematic as it can take years for gold bull markets to materialise.

Added to this option is the problem of storage. If you own Krugerrands, you have the option to hold it yourself (hopefully in a safe) or pay a third party to store it on your behalf. As gold cannot produce any cash flow to offset this, you will need to provide funding through other means, which may not be a practical solution for many.

Gold ETF/ETNs

These Exchange Trades Funds/Notes track the price of gold and are listed worldwide on various stock exchanges. They generally offers higher liquidity than gold coins and while ETFs have an underlying gold asset, ETNs mostly track the price of gold through derivatives without an underlying bullion holding.

As with all ETF/ETNs, there is a bid offer spread involved when buying in/selling out. This means that short term trading is unlikely to produce returns perfectly aligned to those reported on a fund or note fact sheet. There are certain costs involved in insuring and storing the underlying assets, but these are recouped within the fund. This, of course, means that these instruments do not track the price of gold precisely.

For those wearing a tin foil hats and are invested in gold ETFs in preparation for the apocalypse, it is worth noting that not all gold ETFs can be exchanged for physical gold from the issuer of the fund. There are some products that offer an exchange service, but these are a mere handful.

Mining Companies

While the fortunes of gold mining companies generally follow the price of gold, they are diluted or amplified to a higher degree than the physical gold price. These companies generate revenue (not always profitable though!) and have a multitude of factors that influence the share price, such as the strength of the balance sheet, cost of borrowing, labour, quality of shafts it operates and the competence of management. These can either work in your favour or against it, depending on the company itself.

Diversified miners are even more diluted as gold makes up only a percentage of its general portfolio. This can be seen as a diversification measure.

Emerging Market Tracker

For those painting with the broadest of brushes, you can also decide to buy the currency or broad market ETF/index of market that heavily depends on exporting resources to balance its books. This is by far the most diluted, compared to those above, but still remains an option.

As with any investment option, the decision to invest in gold is not simply a binary, buy/sell decision. At Seed, we always spend a significant amount of time considering as many of the influencing factors as possible before offering advice or making an investment decision. We do this to ensure that the best possible option is selected given the unique environment in which the decision must be made.